Case Name:- Commissioner of CGST and Central Excise Vs Edelweiss Financial Services Ltd. (Supreme Court of India)
Summary:
The SC has ruled that service tax is not leviable on the corporate guarantee provided by the parent company to its subsidiaries without consideration. Issuance of corporate guarantee to a group company without consideration would not fall within banking and other financial services and is therefore not taxable service. The SC stated that consideration is must for levying service tax on a corporate guarantee, and thereby, upheld the CESTAT’s order of not levying tax.
Facts, Observations and Ruling of the Case:
- M/s Edelweiss Financial Services Limited (the assessee) issued a corporate guarantee on the behalf of its group company located within and outside India without any consideration. The Revenue contended that the assessee has not discharged the service tax liability on corporate guarantee as the provider of ‘banking and other financial services’ for the period prior to and after 30 June 2012, and issued a SCN.
- Under the Negative List regime, effective 1 July 2012, the existence of ‘consideration’ is one of the essential elements to classify a transaction under the purview of the definition of ‘service’ under Section 65B (44) of the Finance Act. Since the activity does not qualify as a ‘service’, there cannot be any tax liability.
- The CESTAT ruled that any activity shall indicate a ‘provider’ as well as the flow of ‘consideration’ for the purpose of taxability under the Finance Act. In the absence of any of these two elements, taxability under Section 66B of the Finance Act will not arise. Thus, there is no consideration insofar as a ‘corporate guarantee’ issued by the assessee on behalf of its subsidiary companies is concerned. Therefore, the CESTAT dismissed the Revenue’s appeal due to the absence of consideration.
- Further, no effort was made on behalf of the Revenue to assail the above finding or to demonstrate that the issuance of a corporate guarantee to group companies without consideration would be a taxable service.
- Aggrieved by the CESTAT’s decision, the Revenue has filed a civil appeal before the SC.
This is a significant ruling that will set precedence in similar matters and help resolve long drawn litigations on the issue under the erstwhile service tax regime.
Under the GST regime, related party transactions, even without consideration, are treated as deemed supplies and are leviable to GST. In this regard, it is pertinent to note that while the SC has ruled that consideration is a must to levy tax on a corporate guarantee, this may create problems for the businesses under the GST regime. Therefore, the decision is likely to open Pandora’s box in cases of corporate guarantees provided by related parties, intercompany, or directors, as more assessees are likely to come under the Revenue’s scanner.
